Law on Taxation

The Law on Taxation

• Atty. Luis Gerardo C. Manabat is affiliated with De La Salle University

Introduction to Taxation

• Taxation involves inherent powers and general principles

Definition of Taxation

• Taxation is the state's inherent authority to collect contributions and generate revenue for government expenses
• Taxes are mandatory, proportional contributions from individuals and properties, imposed by the state with jurisdiction, to support the government and public needs

Purposes of Taxation

• The primary purpose is to generate funds to cover government costs
• Secondary purposes include strengthening enterprises, protecting local industries, and using taxes as a bargaining chip
• It curbs spending to control inflation and depression, reduces wealth inequality, and promotes science and invention
• Other goals are to enhance local police, enact policies as police power, incentivize activities, and improve living through tax exemptions
• Taxes should serve public purposes, as collateral motives do not invalidate them

Essential Characteristics of Tax

• It is an enforced contribution
• It is proportionate in character
• It is payable in money
• It is levied on persons or property
• It is levied by the state which has jurisdiction over the person or property
• It is levied by the law-making body of the state
• It is levied for public purposes

Nature and Theory of the Power of Taxation

• It is inherent in sovereignty
• It is legislative in character
• It is subject to constitutional and inherent limitations
• Taxation occurs due to the existence of government
• It is based on reciprocal duties between the state and its inhabitants
• It requires a public purpose for lawful taxation

Aspects of Taxation

• Levying of tax involves legislative character
• It is an exercise to impose tax through laws and ordinances
• Collection of tax involves administrative character
• It implements tax laws through assessments and collections

Extent of the Legislative Power to Tax

• The legislature can decide the subjects to be taxed
• It can define the tax's purpose if it serves the public
• It determines the tax amount/rate
• It decides how taxes are collected

Basic Principles of a Sound Tax System

• Fiscal Adequacy, ensures sufficient tax revenue
• Administrative Feasibility, ensures viable tax implementation
• Equality or Theoretical Justice, ensures fair taxation
• It determines the tax system’s functioning, but not its legality

Classifications and Distinctions of Tax

• Subject matter includes personal, poll, property, and excise taxes
• Burden includes direct or indirect taxes
• Determination involves specific or ad valorem taxes
• Purpose includes general, fiscal, revenue-raising or special, regulatory taxes
• Scope can be national, municipal, or local
• Graduation/rate includes proportional, progressive, graduated, or regressive taxes

Limitations on the Power of Taxation

• Constitutional limits are found or implied in the Constitution
• Inherent limits ensure tax serves a public purpose
• It is non-delegation of legislative power to tax
• It has exemption of government from tax
• It includes international comity and territorial jurisdiction

Situs and Double Taxation

• Situs of taxation is the "place of taxation" and how taxes are shared between different jurisdictions
• Internet Commerce is particularly concerned
• Double Taxation means being taxed twice
• It is applicable by the same authority and jurisdiction
• The purpose should also be the same
• It should be during the same period

Escapes from Taxation

• Escapes without revenue loss include shifting, capitalization, and transformation
• Escapes with government revenue loss include avoidance, evasion, and exemption

Escapes from Taxation - Shifting

• Shifting occurs with no government revenue loss
• The burden of paying the tax is shifted to another person
• The taxpayer is the one who incurs the initial tax

Escapes from Taxation - Capitalization

• Capitalization occurs with no government revenue loss
• It occurs if the burden of the tax is incorporated in long term assets

Escapes from Taxation - Transformation

• Transformation occurs with no government revenue loss
• Taxes are said to be "offset" by seller with some benefits

Escapes from Taxation - Avoidance vs Evasion

• Avoidance is anticipating tax exposure and avoiding tax exposure
• Evasion misrepresents transactions to avoid paying

Escapes from Taxation - Exemption

• Exemption grants immunity from tax for specific entities obliged to pay

Construction of Tax Laws

• Legislative Intent is considered
• Resolve doubt against the government in favor of the taxpayer.
• The rule is reversed in case of exemptions
• Literal meaning is used when language is plain
• Tax law prevails if conflicts arise with other laws

Application of Tax Laws

• Tax laws are generally prospective
• This is unless the law provides otherwise
• Also applied unless it is harsh and oppressive
• Tax treaties are applied if confirmed by law
• Government errors in applying tax laws are not prejudicial

Sources of Tax Laws

• Legal rules such as legislation, administrative rules, and judicial decisions
• Treaties with other countries, including tax and other treaties

Kinds of Taxes under the NIRC

• Income Taxes
• Transfer Taxes (Estate and Donor's)
• Value-Added Taxes
• Other Percentage Taxes
• Excise Taxes
• Documentary Stamp Taxes
• Other taxes that Congress may create

Tax Reforms in the Philippines

• President Rodrigo R. Duterte saw the complexity of the tax laws
• He proposed new legislation to make changes
• The legislations would be enacted in 4 to 5 stages (one for each year of his term).
• The first two laws would be passed during his term and the next 2 laws would be passed by the incumbent President Ferdinand R. Marcos
• Republic Act 10963 is the TRAIN Law
• Republic Act 11534 is the CREATE Law
• Republic Act 11976 is the EOPTA Law
• Republic Act 12066 is the CREATE More Law

R.A. 10963 – The TRAIN Law

• Republic Act 10963 or Tax Reform for Acceleration and Inclusion (TRAIN) Law aims to fund economic development in a sustainable, inclusive way
• It is the first in a series of tax reforms financing the “Build, Build, Build" policy

R.A. 11534 – The CREATE Law

• Originally the 'TRABAHO" Law
• It became the "CREATE" Law adding COVID alleviation provisions
• Principles exist to rationalize the system for corporate taxpayers:
• To make things, less burdensome to encourage investors
• To codify and harmonize the various exemptions
• To generate more employment opportunities

R.A. 11976 – The EOPTA Law

• R.A. 11976 or the Ease of Paying Taxes Act” makes the tax system friendlier
• It has the purpose to modernize tax administration and pay taxes efficiently
• Enacting policies and procedures will be appropriate to taxpayers
• A purpose to generate revenues for the government

R.A. 12066 – The CREATE MORE Law

• Latest reform maximizes opportunities for reinvigorating the economy (MORE)
• It enhances the CREATE Law to make the Philippines internationally competitive
• Intended to encourage local entrepreneurs to establish businesses in the Philippines
• It includes reduction of the corporate Income taxes of Registered Business Enterprises (RBEs) under the Enhanced Deductions Regime (EDR)
• It gave more incentives to RBEs and expanded the EDRs
• It also had rationalization and improvement of the Value Added Tax System

General Concepts introduced by R.A. 11976

• Includes new classification of taxpayers

New Classifications of Taxpayers

• R.A. 11976 classifies taxpayers by size
• Micro Taxpayers have less than P3,000,000
• Small Taxpayers have P3,000,000 to less than P20,000,000
• Medium Taxpayers have P20,000,000 to less than P1,000,000,000
• Large Taxpayers have P1,000,000,000 and over
• Clarification may need to made as to how much income, taxes, size etc

Purposes of New Classifications of Taxpayers

• Previously existed 2 classifications; Large Taxpayers and the rest
• Large Taxpayers received more attention because of the amount of revenue it brings to the government
• The new classifications create streamlined processes for taxpayers
• Taxpayers will have operations more in synch with the level of their obligations
• Rules allow taxpayers to specific in size

Registration of Taxpayers

• Taxpayers subject to internal revenue tax must register once
• Registration must be electronically or manually, with the appropriate Revenue District Office
• Register within 10 days from employment, at business commencement, or before tax/return filing
• Taxpayers get a Tax Identification Number (TIN) for returns and documents
• Registration updates for each internal revenue tax type are required

More on Registration of Taxpayers

• Registration updates for business, head office, or branch transfers are needed
• Registration may be cancelled via filing electronically or manually with the Revenue District Office
• The Commissioner of Internal Revenue (CIR) can audit for tax liability
• Registrations are now free, repealing the P500 annual fee per establishment and place of business under EOPTA

Documentary Basis of Taxation

• The Tax Code needs registered sales and commercial invoices for transactions over P500
• R.A. 11976, bases documentation on commercial invoices (primary documents in previous regulations)
• Tax accounting now operates on commercial invoices
• The change causes taxation to operate accounting on commercial invoices
• The accrual method now recognised where cash basis no longer recognised as the basis of taxation
• The Bureau of Internal Revenue may guide on Official Receipts' role

Withholding of Taxes

• Withholding tax applies to income
• Payors withhold income portions before payment
• This remits directly to the government
• Amounts withheld are treated as credit is any amount imposed on the payment
• Businesses must withhold taxes on income payments for deductions
• Follow the law of the given income payment or expense to deduct it from taxable income

Filing and Payment of Taxes

• R.A. 11976 removes the restriction of certain locations to file taxes
• Payment can be done at any bank, revenue district office, or online following the rules of the Bureau of Internal Revenue

Tax Remedies of Taxpayers

• The Tax Code allows remedies in case of over-payments
• The available remedies include question the imposed taxes
• Request to remove taxes
• Request for refund
• Making government officers accountable for illegal acts
• Ease of Paying Taxes reforms removed penalties for wrong filings
• This enables leeway in submitting applications